Wall Street Banking on Republicans to Push Legislative Goals

Sept. 14 (Bloomberg) -- Wall Street is preparing for a
Republican surge in Congress that could help it block proposed
taxes on banks and investments, blunt new financial regulations
and regain some of the lobbying firepower it lost during the
financial crisis.

What bankers won’t be looking for, lobbyists said, is a
repeal -- or any major changes -- to the Dodd-Frank bill, the
most sweeping rewrite of financial regulation since the 1930s.
While the law is widely criticized by the industry, Republican
gains in the November election won’t be large enough to override
a veto by President Barack Obama.

Financial firms, which for most of this year have been
shifting political contributions to Republicans, say they’ll
push Congress to restrain federal agencies that are filling in
the details of the law, writing rules in areas including capital
standards and a ban on proprietary trading. Banks would prefer
to have Republicans overseeing the regulators, lobbyists said.

A Republican takeover would mean the banking industry
“will have an active voice on the Hill, trying to influence the
direction of regulatory agencies,” said Travis Plunkett,
legislative director at the Consumer Federation of America,
noting that only three House Republicans voted for Dodd-Frank.
“The oversight process, grilling agency officials, that’s a big
deal that shouldn’t be underestimated.”

More than a dozen lobbyists, lawyers and officials at large
banks, hedge funds and Wall Street trade associations discussed
in interviews the shape of the banking industry’s legislative
agenda. They spoke on condition of anonymity because their firms
haven’t authorized them to speak publicly before the election.

High-Frequency Trading

Other issues high on financial firms’ legislative agenda
include heading off attempts to regulate high-frequency stock
trading and pushing for trade agreements, deficit reduction and
revamping Fannie Mae and Freddie Mac -- all areas where
financial companies say their interests are more aligned with
Republicans.

Most executives said the industry would welcome a divided
government, because that would make it difficult to pass any new
financial laws. Polls show that Republicans are within striking
distance of taking over the House, where they need a gain of 39
seats, and are drawing closer in the Senate, where they need 10
more seats.

While House Minority Leader John Boehner of Ohio said in
July that he favored a repeal of Dodd-Frank, bank executives
don’t see that as a realistic option.

If Republicans take over the House, banks will try to stop
the push for a tax or fee on the biggest financial companies --
which has been threatened by Democrats to help pay for the $700
billion bailout, implementing the regulatory law and other
initiatives.

Carried Interest

Hedge and private equity funds also hope to derail the
Democrats’ plan to raise taxes on investment profits known as
carried interest. General partners at the funds can now qualify
for capital gains tax treatment on their pay derived from
investment profits, which is lower than the income tax rate.

The Obama administration includes the carried-interest tax
in its 2011 budget proposal, and economists at the congressional
Joint Committee on Taxation estimate it will bring in $13.5
billion over the next decade.

Should Congress be unable to decide the future of former
president George W. Bush’s tax cuts this year, a Republican-controlled Ways and Means Committee may be more receptive to
arguments from the financial industry to preserve lower tax
rates, including those on dividends and capital gains, for the
highest earners.

Milliseconds

Republican lawmakers already have been focused on high-frequency trading, an issue important to hedge-fund managers who
make money using computers to buy and sell thousands of shares
in milliseconds and brokerage firms that execute the trades.

The practice, which accounts for more than 50 percent of
daily stock trading, has drawn criticism from investors and
Democratic members of Congress who question whether it
contributed to the May 6 market plunge when $862 billion was
erased from the value of U.S. equities in less than 20 minutes.

Spencer Bachus of Alabama and Jeb Hensarling of Texas,
Republican members of the House Financial Services Committee,
wrote on Aug. 24 to Securities and Exchange Commission Chairman
Mary Schapiro, advising her to get a better understanding of
what caused the crash before “assigning blame to algorithmic or
high-frequency trading firms.”

Virginia’s Eric Cantor, the second-ranked House Republican,
has urged Schapiro to make sure she has empirical evidence to
support new regulations.

Free Trade

The Republican agenda could also give new life to free-trade agreements with Colombia, Panama and South Korea, which
have languished amid opposition from unions, said Sage Eastman,
spokesman for Representative Dave Camp of Michigan, the top
Republican on the Ways and Means committee. Marisol Garibay,
spokeswoman for Republicans on the House Financial Services
Committee, said Republicans would push to decide the fate of
Fannie Mae and Freddie Mac, the mortgage finance companies in
government conservatorship.

The new Consumer Financial Protection Bureau, to be housed
at the Federal Reserve, may draw great interest from lawmakers,
analysts said. While it has the ability to fund itself, and
won’t be subject to congressional pressure on its budget, the
agency will have to write a slew of new rules in areas ranging
from credit cards to mortgages.

Slowing the Rules

Overall, Republican oversight will “certainly complicate
the rule-writing process and it could slow it down in particular
areas,” said Kevin Petrasic, a former official at the Office of
Thrift Supervision who now is an attorney at Paul, Hastings,
Janofsky & Walker in Washington.

While strong profits have returned to Wall Street during
Obama’s stewardship of the economy, the bankers’ shift toward
Republicans was reflected in campaign contributions this year.
David Hirschmann, president of the U.S. Chamber of Commerce’s
Center for Capital Markets Competitiveness, said that bankers
and the business community feel demonized by the administration.

“For two and a half years, it’s been tar and feather,”
Hirschmann said. “They are just hoping for an environment where
the impact on the broader economy is at least considered” in
setting policy.

In June, the month when Congress was putting final touches
on the Dodd-Frank regulatory law, employees in the securities
and investment industry gave 68 percent of their donations to
Republicans, according to research from the nonprofit Center for
Responsive Politics.

Obama’s Sources

Contrast that with 2008, when employees of securities and
investment firms contributed $14.9 million to Barack Obama’s
presidential campaign, more than any other industry and $6.2
million more than they contributed to Republican John McCain.
Obama’s five biggest corporate sources of money included
employees of Goldman Sachs Group Inc., Citigroup Inc. and
JPMorgan Chase & Co., the center said.

Now political action committees at almost all the big banks
have rebalanced. Goldman Sachs’s PAC has so far given 51 percent
to Democrats for the 2009-2010 election cycle, down from 64
percent in 2007-2008. Morgan Stanley cut contributions to
Democrats from 54 to 47 percent, Bank of America Corp. from 53
percent to 44 percent and Citigroup from 53 percent to 50
percent. JPMorgan’s PAC is the only one to increase support for
Democrats, from 47 percent in 2007-08 to 49 percent so far in
this cycle.

“It’s clear that if Republicans are handed back the keys,
it’s going to be big Wall Street banks that are going to be
driving the car,” said Hari Sevugan, a spokesman for the
Democratic National Committee.